When planning your estate, you should understand different trust options available, such as testamentary trusts and living trusts. A testamentary trust is created through a will and only becomes active after the death of the person who made it. A living trust, on the other hand, is established during an individual’s lifetime and assists in managing and protecting assets.

If you are creating an estate plan, a financial advisor can help you decide on a specific trust based on your circumstances and the needs of your beneficiaries. 

What Is a Testamentary Trust? 

A testamentary trust is a legal arrangement established through a will, which comes into effect upon the death of the individual who created the will, known as the testator. This type of trust is designed to manage and distribute the testator’s assets according to their wishes, providing a structured way to provide beneficiaries their inheritance under specific conditions. Unlike living trusts, which are created during a person’s lifetime, testamentary trusts are activated only after the testator’s passing, offering a posthumous method of asset management.

One of the primary benefits of a testamentary trust is its ability to provide financial security and oversight for beneficiaries who may not be ready to manage large sums of money independently. This is particularly beneficial for minor children or individuals with special needs, as the trust can stipulate how and when funds are distributed. Additionally, testamentary trusts can offer tax benefits and protect assets from creditors, making them an attractive option for estate planning.

What Is a Living Trust?

A living trust is a legal arrangement that allows an individual, known as the grantor, to place assets into a trust during their lifetime. This type of trust is designed to manage, protect and distribute assets according to the grantor’s wishes upon their death. Unlike a will, a living trust can help bypass the often lengthy and costly probate process, providing a more efficient transfer of assets to beneficiaries. This can be particularly beneficial for those who wish to maintain privacy, as the details of a living trust are not made public, unlike a will.

One of the primary advantages of a living trust is its flexibility. The grantor can modify or revoke the trust at any time, as long as they are mentally competent. This means that as life circumstances change, the terms of the trust can be adjusted to reflect new wishes or financial situations. 

Additionally, a living trust can provide continuity in asset management if the grantor becomes incapacitated. In such cases, a successor trustee appointed by the grantor can take over to manage trust assets and handle financial affairs according to the grantor’s instructions.

Differences Between a Living Trust and a Testamentary Trust

Both testamentary and living trusts are designed to help manage and distribute assets. But, they operate in distinct ways that can significantly impact your estate planning strategy. Here are four general differences to consider:

• Creation timing: A living trust is established during the grantor’s lifetime, allowing for immediate management and distribution of assets. This approach can help avoid probate and provide flexibility in managing assets while the grantor is still alive. A testamentary trust, on the other hand, is created through a will and only comes into effect after the grantor’s death. This means probate is required before assets can be transferred into the trust, which can delay distribution
• Probate process: One of the main advantages of a living trust is that it bypasses the probate process, which could allow a quicker and more private distribution of assets. This can save time and reduce legal fees, making it an attractive option for many. Testamentary trusts, however, are subject to probate, which can be a lengthy and public process. This may lead to additional costs and delays in asset distribution.
• Flexibility and control: Living trusts offer greater flexibility, allowing the grantor to make changes or revoke the trust as needed during their lifetime. This adaptability can be beneficial if circumstances or goals change over time. Testamentary trusts, by comparison, are fixed once the grantor passes away, providing less flexibility. Any changes would require legal proceedings, which can be cumbersome and costly.
• Privacy considerations: Living trusts provide a higher level of privacy since they do not go through probate, keeping the details of the estate out of public records. This can be important for those who value discretion in their financial matters. Testamentary trusts, comparatively, are part of the public probate process, which means the details of the estate may become public record.

How to Choose the Right Trust for You

Deciding between a living trust and a testamentary trust depends on your goals and the needs of your beneficiaries. A living trust could help you avoid probate, keeping your estate private and allowing you to update terms as needed. Comparatively, a testamentary trust, which is created through a will, takes effect after your death and is useful for controlling distributions over time, especially when minor children or beneficiaries with special needs are involved.

If avoiding court involvement and maintaining privacy matter most, a living trust is likely the better choice. But, if you prefer a structured approach to distributing assets after death, a testamentary trust may be more suitable. Consider how soon your beneficiaries need access to funds, whether you want ongoing management and how much control you want over distributions.

An estate planning attorney or financial advisor can help you decide based on your assets, family situation and long-term goals. They can also explain tax implications, trustee responsibilities and how each trust type aligns with your estate plan.

Bottom Line

Testamentary trusts take effect after death, controlling asset distribution, which is helpful for minors or those with special needs. Living trusts start during your lifetime, avoiding probate and allowing faster, private transfers. The right choice depends on your goals and how you want your estate managed.

Estate Planning Tips

• A financial advisor can help you create an estate plan to manage and distribute assets for your beneficiaries. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.

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